Cash Earners over Cash Burners
At Totus, we like to invest in quality cash earners and with the ability to short and offset these with cash burners. With 2019 coming to a close, one thing we believe investors can’t ignore heading into 2020 is the risk of business models that are heavily dependent on external capital to fund their growth or even worse, keep their existing operations afloat.
Historically low rates have led to an increase in access to capital with the markets’ (both public and private) willingness to pay up for growth. This abundance of capital has led to a range of questionable business models evolving and becoming publicly listed, which have not been tried or tested through a cycle and may never be profitable (even some self-proclaimed - Uber).
In addition, these companies have been priced to perfection, with some becoming known to the market as ‘unicorns’. We believe that a lot of these valuations do not consider the inherent risk of access to funding and have limited valuation support during a market correction or worse a bear market.
In recent months, we have seen the failed IPO attempt of WeWork and a de-rating in fellow past unicorns such as Uber, Lyft, Peloton and Slack to name a few, as well as a sentiment change in the Australian tech market.
Could this be the initial sign of the market waking up to the unsustainable nature of these businesses and future funding requirements?
Who knows, but we do know the laws of combustion say that the fire will fizzle if the fuel becomes scarce.
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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.
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Ben has 19 years of financial markets experience on both the buy and sell side. As an analyst at UBS Australia and Morgan Stanley in London, Ben covered a broad range of companies and sectors.